The bad days for India’s realty sector are far from over. Poor sales and high costs will continue to strangle cash flows of large realty firms over the next year, according to a report by Moody’s Investors Service released on Tuesday.

Timely execution of projects by developers have been stymied by delayed approvals and stretched liquidity in the past two to three years. The report says that project delays will continue to slow down cash collection. Delays also reduce investor demand for new projects by locking up capital and reducing expected returns.

Pan-India firms such as Godrej Properties Ltd and Mahindra Lifespace Developers Ltd will experience tighter liquidity compared to their Bengaluru-based counterparts, although their presence in markets such as Bengaluru and Pune will help cushion the impact.

While construction costs have risen in the past four years amid high inflation, the high holding cost for land parcels due to debt-funded land purchases and delayed project launches have further increased project costs. The pressure on profitability, however, discourages developers from reducing prices, which further squeezes sales volume growth.

The aggregate sales volumes for Moody’s sample of top eight developers declined 24% to 20.41 million sq. ft in the year ended March 2014, based on company filings. Sales in 2014-15 improved, rising to 21.1 million sq. ft, but continued to trail historical levels.

Owing to frequent delays in project execution, home buyers prefer projects from large and reputable builder firms. This preference, coupled with the limited supply of fresh inventory, has helped support the sales of large developers. “Still, we expect their sales to remain flat over the next 12 months, with affordability remaining a challenge,” Moody’s said.

“At the same time, despite the difficulties, we expect solid economic growth in India in 2014-15 to provide some support to housing sales, while the likely gradual easing of lending rates will boost investor confidence and investment activity,” Vikas Halan, Moody’s vice-president and senior credit officer, said in a statement.

“Cuts in interest rates by the Reserve Bank of India (RBI), if passed on by the banks, will filter down to the property market, reducing the cost of borrowing for developers as well as buyers, and supporting demand,” said Halan.

“But high home prices and decline in savings rates will outweigh these factors, particularly in Mumbai and Delhi; while more generally, the property market in India exhibits a notable degree of variation in terms of affordability,” said Halan.

The report said that a contraction in the household savings rate, including savings in the form of physical assets, pointing to a demand for real estate will remain subdued over the next 12 months.

India’s household savings rate, which measures household savings as a percentage of gross domestic product (GDP), declined to about 18% in fiscal 2014 from about 23% in fiscal 2012, according to RBI, amid persistently high inflation and a fall in income. Savings in the form of physical assets also fell 9% to Rs.12.1 trillion in the same period.

“Affordability varies across cities, with buying activity constrained where prices are the highest,” it said.

The top 1% of India’s households had an annual income of over Rs.12.5 lakh in fiscal 2011, according to the most recent data available from the National Council of Applied Economic Research. Assuming an annual growth rate of 10% in income, this would result in a threshold household income of Rs.18.3 lakh for the top percentile of households.

The average home price for a mid-segment home therefore varies from eight times the threshold income in Mumbai to three times in Pune, according to Moody’s estimates (see graphic). So homes in Mumbai remain unaffordable to a large percentage of households compared with cities like Pune.

“There was an unprecedented rise in property prices between 2009-13, leading to a situation today when developers are forced to keep prices in check, or home buyers will stay away. However, investors won’t participate unless prices start going up,” said Pankaj Kapoor, managing director, Real Estate Rating and Research Pvt. Ltd.

From a year ago, the BSE Realty Index has fallen 19.5%, while the benchmark Sensex is down 6.8%.

Not just pricing, but delays in project execution have also curtailed speculative demand, keeping away investors who locked up capital for a prolonged period and did not get the expected returns. Given the high inventory levels, realty firms are focusing more on ongoing projects rather than launching fresh ones.